Category Archives: China-U.S.

Huawei’s 5G Coins It In Despite Washington’s Objections

HUAWEI’S FIRST-QUARTER results suggest that the United States’s campaign against the world’s biggest telecoms equipment maker is having limited effect, especially outside the advanced economies.

The company has long denied Washington’s allegation that Beijing ultimately controls it and that its equipment could be used for espionage in the service of Chinese state security, the basis of the Trump administration’s campaign to prevent other governments from using Huawei’s 5G equipment.

Huawei says its income was 179.7 billion yuan ($26.8 billion) in January to March, a 39% increase on the same period a year earlier. It did not disclose its net profit but said it operated at an 8% net profit margin, slightly higher than in the first quarter of 2018.

It reported sales increases in all its three customer groups — carriers, enterprise and consumer customers. On the contentious 5G technology, it said it had signed 40 contracts with leading global carriers, and shipped more than 70,000 5G base stations, a number it expects to reach 100,000 by May. It says 2019 will be ‘a year of large-scale deployment of 5G around the world’.

In practice, only a handful of countries have heeded Washington’s exhortation to follow it in banning Huawei from their 5G telecoms network: Australia, New Zealand and Japan, all close US allies in Asia.

Europe, which will likely lead 5G rollouts — eleven EU countries have 5G auctions scheduled for this year and six for 2020, with 30% of its internet users expected to be on 5G by 2025 — has been more ambiguous in its response.

Denmark, Germany, Italy, Norway, Poland and the United Kingdom all have expressed concerns about the cybersecurity risks of contracting a firm with opaque links to Beijing. However, Belgium has declined to ban Huawei, saying it has found no deliberate technological compromises in its equipment that could be misused by China’s state, but it will keep the equipment under review. Germany has taken a similar line but is drafting quality and cybersafety standards for 5G suppliers and talking about a ‘no-spying agreement with China.

France is debating 5G legislation that would impose extensive security tests. The report of a Dutch government investigation into Huawei is due in May when the United Kingdom is also expected to make a final decision. London has repeatedly raised concerns about Huawei equipment and the firm’s ability to fix cybersecurity problems but also has one eye on a post-Brexit trade deal with China.

For all of Europe, keeping China, a critical trade and investment ally, on side while securing the Internet of Things devices and automated vehicles that 5G will enable, from malicious state and non-state cyber attacks will be a delicate balancing act, made harder still by the current unease of the transAtlantic relationship. Washington may ban US firms from working with any others, including European firms, who use Huawei technologies and equipment.

Brussels and EU member governments will try to keep the decision-making process on the technical level and not get sucked into the political dimensions that saw Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder, Ren Zhengfei, arrested in Canada in December at Washington’s request on charges of bank and wire fraud in violation of US sanctions against Iran. (She denies wrongdoing.)

The European Commission’s recently published recommendations on 5G network cybersecurity rejected bans on specific suppliers (unnamed, but for which read Huawei) and told member states to come up with joint EU-wide security checks for firms building 5G networks in Europe by the end of this year.

While Europe will be an important beachhead for Huawei’s 5G equipment and offers a near-term market, the company is looking beyond Europe. Many parts of Asia, Africa, Latin America and the Middle East will transition from 2G/3G/4G to 5G over the next ten years. That is where Huawei’s future sales lie.

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US-China Trade Talk Progress Seems Real If Ill-Defined

VICE-PREMIER LIU HE will be back in Washington next week for a further round of trade talks with the United States.

This follows a lightning round in Beijing on Thursday and Friday with US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. Afterwards, both sides talked up the progress made particularly, it is widely reported, over ‘forced technology transfer’, the requirement for foreign investors to yield intellectual property in return for market access.

There is still no official word on the chapter and verse of this progress, and the use of words such as ‘constructive ‘and ‘candid’ to describe the talks suggest significant sticking points remain, particularly over enforcement mechanisms, as we have noted before in regard to China’s proposed new foreign investment law. So this Bystander will reserve judgment for now.

Regardless, it does seem that Beijing is engaging with the issue to a degree that it has not before. Its old argument that there was nothing to talk about as forced technology transfer did not happen, has been abandoned for the threadbare nonsense that it always was.

The outstanding questions now are to what extent will Washington gloss over some of the unresolved matters and how far it will be prepared to go in making concessions that will let China’s top leadership not lose face domestically.

There will also need to be a close reading of the Chinese- and English-language versions of whatever final text of a deal is agreed for each of the six areas of discussion: forced technology transfer and cyber theft; intellectual property rights; services; currency; agriculture and non-tariff barriers to trade. Many a slip…

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China’s New Foreign Investment Law Ready-Made For A Trade Deal

THE NEW INWARD foreign direct investment law, rushed forward and freshly rubber-stamped by the National People’s Congress, ticks all the boxes that Washington would want to see ticked.

But then it has been framed to do just that.

It overtly levels the playing field between foreign and Chinese companies in that it forbids forced technology transfer as a condition of foreign investment approval and makes it a criminal offence for officials to share foreign investors’ commercially sensitive information with Chinese firms (furnishing that information remains mandatory for local subsidiaries of international firms, however). Intellectual property protection is high on the list of US negotiators’ demands in the current round of US-China trade talks.

It also holds out an olive branch on another of their demands, greater market access, by adopting a ‘negative list’ system. Any sector not explicitly restricted will be open to foreign investors. However, there will still be 48 sectors that will remain off-limits, such as gene research, religious education and news media, or only conditionally accessible, such as oil and gas exploitation, nuclear power and airlines.

Regardless, both aspects can be packaged up to mutual advantage, a ‘win’ for the US side and a ‘concession’ by the Chinese one, though in truth they are neither.

When the new law comes into force on January 1, 2020, as with all Chinese legislation, it will provide a framework that will be open to interpretation and subject to enabling rules and regulations and the rigidity and frequency with which it is implemented.

Enforcement and redress via the courts is another matter. The judiciary is subordinate to the Party. Courts, particularly the new specialist business courts have due process, but also know their place. Every foreign firm investing and operating in China needs to appreciate that, and the difference between rule of law and rule by law. China has the latter.

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Options Narrow For A China-US Trade Deal

SUMMITS ARE FOR signings. US President Donald Trump’s second summit meeting with North Korean Leader Kim Jong-un in Hanoi should never have taken place. Or at least not until after officials had worked out what the agreement between the two countries was going to be. President Xi Jinping is not prepared to put himself at risk of the sort of fall-out that followed Trump walking out on Kim and that summit ending prematurely with no agreement.

The presidents meeting at Trump’s Florida resort Mar-a-Lago pencilled in for the end of this month to sign-off on a China-US trade agreement remains no firmer that, with Terry Branstad, the US ambassador in Beijing confirming to the Wall Street Journal that a date had not been finalised. The boosterish talk a couple of weeks back that a deal was near enough to completion to suspend the introduction on March 1st of 25% US tariffs on $200-billion-worth of Chinese exports is heard no more.

The sticking points of the agreement are proving as intractable as this Bystander has suspected all along that they would be, particularly over state subsidies, market access and forced technology transfers. No country readily changes its economic development model without either good cause or great pressure.

However, even the mechanism for monitoring and enforcing an agreed timetable for China to remove tariffs is proving difficult to nail down, as is getting the US side to agree to a schedule to withdraw its tariffs. The enforcement mechanism must be “two way, fair and equal,” Vice Commerce Minister Wang Shouwen said this weekend.

The US president is pushing for an early conclusion to a deal for political reasons. He needs demonstrable benefits from it to take into his 2020 re-election campaign. Xi also needs a deal that avoids him looking as if he has come off second best to the United States or has done anything to exacerbate the current slowdown in the economy.

For both, a narrow trade deal with enforcement mechanisms around only tariff-removal regimes seems more and more likely. Beyond that, Beijing will agree to buy more US produce and industrial goods and codify economic reforms that it is already planning to introduce. The more significant structural issues will be kicked down the road.

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US-China Trade Dispute Moves From Technical To Political Phase

US PRESIDENT DONALD TRUMP has extended the March 1 deadline for raising tariffs on $200 billion of Chinese imports pending a summit meeting with President Xi Jinping in Florida probably in the second half of next month.

Trump tweeted that ‘substantial’ progress had been made in the high-level trade talks between the two countries.

State media have used the same description of the progress.

The negotiating teams have been working on the text of an agreement that will cover currency, cyber theft and forced technology transfers, services, agriculture, intellectual property and non-tariff barriers. These texts will provide the framework for what state media call ‘the next phase’ of discussions.

There is no official readout from either side of what that progress is but it is thought to have been greatest over the yuan-dollar rate, technology transfer, intellectual property protection and non-tariff barriers — all areas in which Beijing has already been moving in support of its long-term economic reforms to rebalance the economy. China will also be making some immediate large purchases of US goods and produce to cut its headline trade deficit with the United States.

The sticking points are likely to remain subsidies and other supports to state-owned companies, which go to the heart of China’s economic development model.

Until the finalised texts can be seen, it will be impossible to judge what ‘substantial progress’ means, what the pace and scope of it will be, what remains unsettled and what mechanisms will be put in place to monitor and enforce whatever is agreed.

The US team will make one more visit to China for further discussions on that. The fact that Xi is going to meet Trump in Florida in late March rather than on Hainan Island immediately after the Trump-Kim Jong-un summit is a sign of how much of a gap there is between the two sides still, and how little Beijing has conceded on that score.

There is also the little-mentioned question of what concessions will be expected of the United States.

For now, however, it will be all about appearances and how the two presidents control the ‘optics’ of an agreement, which both men need to appear to domestic constituencies as a ‘win-lose’ deal more than a ‘win-win’ one.

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US-China Trade Deal: The Devil Is In The Enforcement

BEIJING AND WASHINGTON are both talking up progress by their trade negotiators as they each look to come up with a formula for avoiding the damaging consequences of the imposition of tariffs on US-China trade that will otherwise occur at the end of next week.

News that the Chinese team led by Vice-Premier Liu He will be extending this week’s two-days of talks in Washington can be read either way: that agreement is nearing and just needs a final push; or that it remains elusively far away.

On one superficial level, this Bystander believes, it is the former, but deeper down it remains the latter.

What is likely to be agreed by March 1, the deadline to conclude an agreement set by Presidents Xi Jinping and Donald Trump over dinner at last autumn’s G20 meeting in Buenos Aires, is a framework for further talks with six tracks: currency, cyber theft and forced technology transfers, services, agriculture, intellectual property and non-tariff barriers.

Each track would have binding objectives in terms of structural economic change in China. In addition, there would be an agreement to cut China’s bilateral merchandise trade surplus with a number of immediate big-ticket buys of US goods and produce, notably soybeans, which had been a $12 billion a year sale for US farmers before the tariff tit-for-tat started. Energy and industrial goods will also be on China’s shopping list.

The sections in the agreement for the six tracks would have been called memoranda of understanding in the old diplomatic language. Donald Trump does not like the term, and slapped down the US Trade Representative Robert Lighthizer for using it. Trump is a ‘dealmaker’, not a memorandum of understanding sort of guy; and to be fair to the president, touting that he has secured the ‘greatest memorandum of understanding  — ever’ just does not have the same ring as being able to boast of the making the ‘greatest deal — ever’.

Trump’s intent is to tie the big red bow on a deal at a meeting with Xi sometime after his summit with North Korean leader Kim Jong Un in Hanoi on Wednesday.

The six areas are all ones in which Beijing will be prepared to agree binding objectives. They are aligned with the structural changes it anyway needs to make to rebalance the economy. The sticking points are how far and how fast Beijing is prepared to go at this point, and, crucially, what monitoring and enforcement mechanisms it is prepared to accept.

Each of the six tracks has obstacles of differing degrees of difficulty to overcome. The currency one has already reportedly been settled. It was probably the easiest to tackle, given that China has a managed float for its currency in place and the yuan-dollar rate provides a clear and transparent measure, even if there is plenty of scope for argument over what constitutes a ‘fair-value’ rate.

On the other five, finding the right language that meets the Trump administration’s tough demands for structural change yet gives Beijing the room to soft-peddle has been proving as difficult as would have been expected.

The most progress has been made on intellectual property rights and improved market access; the least, on the role and practices of state-owned enterprises, subsidies, forced technology transfers from US companies operating in China and, thorniest of all, cyber theft of US trade secrets.

That last one goes to the heart of the issues between the two sides. If China is to succeed in ‘catching up’ with the US economy industrially and rebalancing its economy so the next phase of growth is driven by high-value manufacturing and services based on the next generation of industries, then it will need to acquire the technology to do so by fair means or foul and nurture the national champions to develop and exploit it.

Those priorities will not be given up lightly.

For Trump, a big political win on China, one of his core issues in the 2016 presidential election campaign, is essential going into his 2020 re-election bid. With the newly energised Democrats snapping at his heels, he needs headline concessions that sound grand and victorious to his electoral base, especially in the tightly contested states of the (formerly) industrial MidWest.

Xi, too, needs to demonstrate domestically that he has got the measure of Trump and that he is not yielding any sovereignty to Washington over the reform process. Any sign of the latter will be seized upon by his political critics.

So for both men, perceptions at home are critical. That is what an agreement at or around the end of the month will deliver above all.

Negotiating the details of implementation of what is agreed will take far longer. China will drag its feet on that to the extent that it can get away it until if and when US attention switches elsewhere whether under the current president or his eventual successor. Even a two-term Trump would be out of office ahead of the delivery year for Made in China 2025.

For that reason, this Bystander will be reading closely the details of the enforcement and monitoring procedures that are agreed.

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IMF Sees China Slowdown As Only One Reason To Be Gloomy

THE INTERNATIONAL MONETARY Fund tags a greater-than-envisaged slowdown in China as one of the triggers beyond escalating trade tensions that could cause it to become even gloomier about global growth prospects.

In the latest update to its World Economic Outlook, the Fund has cut its October forecasts for global growth this year and next by 0.2 of a percentage point and 0.1 of a percentage point to 3.5% and 3.6% respectively.

For China specifically, the Fund says that, despite fiscal stimulus that offsets some of the impacts of higher US tariffs, its economy will slow due to the combined influence of needed financial regulatory tightening and trade tensions with the United States.

A resumption of the ramping up of US tariffs after the March 1 expiry of the truce in the two countries’ trade dispute — and with it, presumably, retaliatory tariffs against the US on Beijing’s part — is one self-evident risk.

However, the Fund is holding to its October forecast of 6.2% growth in China in both 2019 and 2020. That will be down from this year’s 6.6%.

In detail, it says:

China’s economy slowed in 2018 mainly due to financial regulatory tightening to rein in shadow banking activity and off-budget local government investment, and as a result of the widening trade dispute with the United States, which intensified the slowdown toward the end of the year. Further deceleration is projected for 2019. The authorities have responded to the slowdown by limiting their financial regulatory tightening, injecting liquidity through cuts in bank reserve requirements, and applying fiscal stimulus, by resuming public investment. Nevertheless, activity may fall short of expectations, especially if trade tensions fail to ease. As seen in 2015–16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure.

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